401(k) With No Match, Should You Contribute?

Walter Updegrave of CNN/Money recently fielded a question from a guy whose employer had stopped matching his 401(k) contributions. He was wondering if he should start looking for a new job.

This is a perfectly reasonable question, as a loss of this sort of benefit is effectively a pay cut. But it also relates to a more general question: What should you do if your employer doesn't match 401(k) contributions? Should you still contribute?

In general terms, I recommend contributing enough to your 401(k) to get the full match. After that, I would recommend funding and IRA - either traditional or Roth, depending on your circumstances - before turning your attention back to your 401(k).

Why? Because 401(k) plans often leave a lot to be desired. High fees, poor investment choices, etc. With an IRA, you have complete control. Thus, you're free to choose a low cost provider with a great selection of funds.

And even if your 401(k) currently offers decent options, keep in mind that the situation could change in the future. By focusing on your IRA once you capture the match on your 401(k), you maintain complete control over a significant chunk of your money.

Once you capture the match and max our your IRA, you should (probably) turn you attention back to your 401(k) due to the tax benefits. If your 401(k) plan has truly atrocious investment options, then a case could be made for bypassing it in favor of a taxable account. But hopefully you can find something serviceable in your account.

But if your employer doesn't offer a match, I would go straight to the IRA. Once you hit the IRA contribution limit, then you can consider the 401(k). Here again, the tax benefits will hopefully outweigh any other limitations associated with your 401(k). If not, consider investing in a taxable account.

Of course, once you leave your job, you are free to roll your 401(k) over into your IRA - and I recommend that you do so. Alternatively, you could leave it in place or roll it into your new employer's plan, but here I again I would focus on maximizing control of your funds.

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